How to measure entrepreneurial ecosystems

I love reading data-driven articles on entrepreneurial ecosystems, and Nick Beim’s new article “The Rise and Future of The New York Startup Ecosystem” is no exception.

What’s unique about it is that is uses two measures, total amount of VC investment and exists about 500 million,  to compare ecosystems. Nick shows that while NYC’s ecosystem might still be small by Silicon Valley terms, it’s the same size as as Boston (if not bigger) despite the fact that NYC lacks a high profile research university like  MIT (Colombia stands in the corner of the room and looks at the floor in embarrassment; no one even notices NYU).

Both these metrics are nice because they give us real, comparable numbers. Comparing regions is always a difficult process because of a lack of good, comparable data that actually talks about entrepreneurship specifically.

However, there are some problems with these measures. VC isn’t geographically neutral: venture capitalists tend to invest in firms near them (I could give you so many citations for this but just throw ‘venture capital geography‘ into google scholar and go wild). So, places with more VC firms are likely to have more VC investments. This is called a ‘Matthew Effect,’ meaning that places with an already existing advantage continue to get that advantage at the expense of worse off places. So, places with lots of existing VC investment will attract more VC firms, leading to higher levels of investment. Now, this isn’t deterministic: New York-based venture capital firms are increasingly investing in firms in Toronto and Ottawa. Two venture funds just put over 100 million into Ottawa’s Shopify last year. Similarly, without this kind of financial backing, it’s hard to get a $500 million + exit.

Because of this, there are maybe 5-10 cities in America where we’d expect to see enough venture capital invested to actually put the data in a spreadsheet and make a pretty graph with out resorting to logging everything.  But I think that there are more than 10 entrepreneurial ecosystems in America. We need to find better metrics that allow us to identify them in ways that go beyond VC investments and exist.

However, this means a lot more work on the part of researchers. It’s easy to get VC data if you’re willing to pay; it’s much harder to figure out the contours of a regional culture or count how many mentors there are within a community. This requires a more in-depth, case study approach. I’m just beginning to think about how we can measure ecosystems in a way that gets at all these hidden factors but at the same time allows us to systematically compare different regions.

One last note: Nick’s article is particularly nice because it actually mentions cost of living. Major ecosystems like NYC, Boston, and San Fran are having a cost-of-living crisis. It’s going to become increasingly hard for entrepreneurs, especially young ones, to actually live and work in these places. How entrepreneurs support themselves prior to being bought by Facebook for 19 billion dollars is going to become an increasingly important question as time goes on.

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This Waterloo startup, was launched, grew, and was bought up by Google in less time than it took me to research Waterloo’s entrepreneurial environment.